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EC's attack on AIG to defend SII is desperate

The European Commission’s reply to Prudential’s threat to quit the UK over Solvency II won’t win it any friends

The European Commission is clearly getting desperate. The commission’s statement responding to life insurer Prudential’s threats to leave the UK over Solvency II was hard-hitting and punchy – a welcome departure from the mealy-mouthed legalese the commission is better known for.

However, some of its arguments are wide of the mark and unlikely to win over disgruntled insurers.

The commission had to speak out, of course. Dissatisfaction with the ending new Europe-wide capital regime for insurers is growing apace. Yesterday outgoing L&G chief executive Tim Breedon added his voice to the growing number of vocal dissenters, dubbing Solvency II a “mess”.

Waste of time

While publicly getting on with the job of implementing the new capital regime, several insurance chiefs privately think the exercise is a waste of time. What was supposed to be a simple, strong capital structure for Europe’s insurers has become an unwieldy tangle of bureaucracy that few industry captains can wholeheartedly endorse. Some even wonder whether it will ever see the light of day.

One of the commission’s arguments is: “The financial crisis demonstrated only too clearly how important good risk management and sound governance are.”

The insurance industry, however, did not cause the crisis through poor risk management or governance. Quite the opposite – they weathered the storm well. In addition, insurers have dealt with their own problems without so much as a blip. The global industry paid out more than $100bn in catastrophe claims in 2011, while returns on their risk-averse bond portfolios were slashed, and all this without a single bankruptcy.

The industry has done so little crowing about this success that UK Chancellor George Osborne complained to the ABI that politicians didn’t realise how successful the industry was.

Adding fat to the fire

The statement then adds: “This is no time for complacency in the financial sector”, apparently suggesting the industry’s railing against Solvency II is down to inertia rather than flaws with the regulation.

The commission’s comment that “the old American system gave us AIG” is likely to add fat to the fire. AIG’s troubles were caused by its financial products division, which had nothing to do with insurance or insurance-related risk and were largely an anomaly in the industry. Using this as an argument looks naive, and risks infuriating insurers.

No-one is arguing that the old European way of measuring capital, using a percentage of the premium written regardless of the risks being assumed, is acceptable. No-one is arguing that the increased focus on measuring risks appropriately is unwelcome. The principles behind Solvency II are largely applauded by the industry. As the commission rightly points out, the industry campaigned for Solvency II. But they certainly didn’t ask for the resulting shambles they are being asked to implement.

Accusing the industry of misreading the situation when the situation is still so unclear will only hinder rather than help.

Trumpeted as key to the insurance industry’s future wellbeing, Solvency II has instead cast a shadow thanks to delays in its implementation. Will it ever come into force? Here we answer that question plus others on everyone’s lips